實耐寶 (SNA) 2002 Q4 法說會逐字稿

Please stand by. Good day everyone and welcome to today's Snap-on Incorporated Q4 End Year Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to Mr. William Pfund, Vice President Investor Relations. Please go ahead sir.

Thank you operator. I would like to welcome everyone to Snap-on's Q4 and 2002 yearend earnings conference call. With me this morning are Dale Elliott, Chairman, President and CEO and Martin Ellen, Senior Vice President and CFO.

Dale will begin today's call with some general comments about Snap-on's performance in 2002 and the strategic initiatives that we've put in place to drive growth and shareholder value. He will also outline what we see going forward, and what you might expect from Snap-on in the coming year.

As you know, Martin joined Snap-on in mid-November. Following my brief review of the details behind our Q4 performance, Martin will cover our financial goals and priorities and share with you some of the assumptions behind our 2003 outlook. We will then open the call up to your questions.

Consistent with our policy and past practice, we encourage your questions during this call. We will not discuss undisclosed material information off-line. Also, any statements made during this call the state management expects, believes, anticipates or otherwise state the company's plans or projections for the future are forward looking statements and actual results might differ materially from those made in such statements. Additional information concerning the factors that could cause actual results to materially differ from those in the forward-looking statements are contained in the news release an 8K issued this morning by Snap-on and in the latest 10-Q, 10-K and other periodic reports filed with the SEC.

In addition, this call is being recorded by Snap-on Incorporated and it is copyrighted material. It is intended solely for the purpose of this audience, therefore, please note that it cannot be recorded, transcribed or rebroadcast by whatever means, without Snap-on's express permission. Your participation implies your consent to our recording this call. Should you not agree to these terms simply drop off the line. Now let me turn the call over to Dale Elliott.

Thank you Bill and good morning everyone. Throughout the past year Snap-on has been focused on several key initiatives to achieve future profitable growth and the long-term value for our shareholders. These initiatives include supporting the expansion enhancement of our dealer base, developing new value added products to ensure we remain responsive to our customers' needs and strengthen our market leadership and creating a culture committed to value creation through operational improvements and process discipline. While there is work yet to be done, we are clearly making progress on each of these fronts.

Our total U.S. dealer count, including second vans and second franchises is the highest it has ever been and exceeds the number of U.S. dealer vans operated by the two largest competitors combined. This has led to an improved level of customer care and service.

Our National Dealer Advisory Counsel has been an active supporter and contributor to the success of this dealer enhancement program and dealer morale appears to be steadily improving. Innovative products introduced in recent years have not only won awards, but more importantly, they exceeded sales expectations and helped us gain market share in a difficult economy.

Substantial progress was made against our new product sales target, as items introduced during the past three years contributed approximately 23% of sales, compared with a level of 15% in 2001.

Our operational fitness activities are producing cost savings and improved cash flow. Cash flow generated from increased asset efficiency exceeded net income by 68% for the year and resulted in a 29.2% net debt to capital ratio below our long-term target of 30% - 35%. Our results for the quarter and for the year reflect the internal transformation that has been taking place in our company over the last 18 months under our driven to deliver business process. This process is built around three strategic principals, operational fitness, quality people and profitable growth. It is the balance of these three principals that will produce sustainable value for our shareholders. We are very encouraged by what we are seeing and the potential benefits that this process will unlock. That said, the economic environment in 2002 was a challenge for our company, as it was for many others and masked much of the progress made during the year. Reported net earnings for the Q4 end year were in line with our most recent outlook. While sales and earnings were largely as expected, volume and margins were impacted by our efforts to increase inventory terms for both Snap-on and our dealers, a soft industrial market place and continued weak demand for big ticket diagnostic and equipment products.

As you know in 2001 we announced a series of restructuring initiatives to address under-performing operations and to better align our people, businesses and processes to market place realities. During the Q4 we continued to take actions that, despite their short-term impact, were necessary and appropriate to position our company for long-term success. We finalized the 2001 restructuring activities on time at the end of this year, and, with our cost containment efforts, exceeded $40m of savings that we had anticipated when we announced the program. Of these savings approximately one half was reinvested to support new product development and other issues for profitable growth. Unfortunately, the remainder of the savings was offset by the impact of lower volume and higher spending during the year.

Last year, as part of the restructuring, we took a number of steps to drive operating efficiencies and transition our European Sun Diagnostics business to a 'made to order' more pole based operation. Those actions moved that operation from near breakeven level to a solid profit by the second half of 2002.

During the Q4 The Sun Brand was re-launched with a new marketing program to our European distributors which was well received. In the Q4, similar to the European diagnostics model, projects were identified in our European equipment businesses that would focus our manufacturing, streamline processes and eliminate a number of non-value added activities. Whilst this did entail a significant head count reduction as one facility, these changes are enabling us to get closer to our customers and to a true pole approach and manufacturing.

In our dealer group, the 'more feet on the street' program has continued to expand coverage in our proprietary channel. It has also provided our dealers with an opportunity to grow and enhance their business to second vans and second franchises. With the emphasis on applying solid business practices in our dealer organization. Under this program we added a net 49 'new feet on the street' during the Q4. For 2002 in the U.S. we added a net 193 dealers. Over the last two years the net number of dealers increased by 10.4% bringing the total number of U.S. dealer vans to 4,222 at year end, exceeding our target of 10% growth over the two year period.

It's important to note that the majority of this growth was achieved with second vans and second franchises which underscores our efforts to grow through the success of our dealers. Market demand and sale through the dealers' customers remains steady. Sales by our dealers to their customers increased at mid-single digit rate for the full year. As we have noted previously, our sales were reduced as a result of our conscious efforts to improve inventory turns and the financial strength of the dealer base. With less than 100 open routes in the U.S. at yearend, the demand for a Snap-on franchise remains strong. As we look to 2003 we are confident that Snap-on and its dealers will continue to take care of customers, grow sales and enjoy the benefits of improved market penetration.

Another important step in our evolution announced during the Q4 was the acquisition of assets related to the vehicle scanner and e-technician operations of NexSec Technologies. These additions give Snap-on immediate access to the heavy-duty truck and off-road vehicle diagnostics market place, a complement to our existing diagnostic business and product offering.

The acquisition also provides Snap-on with enhanced diesel and essential diagnostic tool expertise and relationships, while presenting intriguing opportunities with the wireless and telematics technology. The offerings are an important addition to our growth platform and we are in the process of rapidly integrating them into our diagnostics business.

Our efforts around profitable growth and operational fitness were complemented by our emphasis on quality people. During the year we made significant strides in aligning performance matrix with our compensation plans and ensuring that we have the people we need to continue to drive our efforts in the future.

In 2002 our executive team was completed with the addition of Nick Pinchuk to head our Commercial and Industrial Group and Martin Ellen as our Chief Financial Officer. Both are strong complements to the solid and experienced existing team members. With this team we have the capability to execute our plans to build shareholder value. I am confident that we are on the right track and with the progress we've made this past year, we have the foundation in place upon which to build sustainable growth in the future. With that, I can now turn the call over to Bill Pfund who will cover our Q4 performance. Bill.

Thank you Dale.

Q4 and full year 2002 reported net earnings per share were $0.56 and $1.81 respectively. Without the effects of special items, Q4 EPS would have been $0.50 per share, in line with the outlook we provided in October. Our earnings don't necessarily reflect the full extent of the progress we're making in strengthening the company for the future. We are realizing the benefits of restructuring in fewer facilities and lower head count, improved processes, reduced costs, and improved cash flows.

While the economic environment did create some head-wind, we gained share in the market place thanks to our managed dealer expansion and new product introductions.

Overall, net sales were up 2.8% for the quarter and up slightly for the year with most of the gains arising from favorable currency translation. The sales gains in the Q4 reflect an increase in worldwide industrial tools and equipment, despite the continuation of a generally weak economy and market for big ticket products. Additionally, the successful introduction of new products during the last three years and continued steady strength in the overall U.S. demand for tools by automotive technicians were dampened by our continued efforts to improve the inventory trends of Snap-on and our dealers.

Moving on to our consolidated gross margin. While the margin as a percent of sales was flat year over year, excluding the effects of special items in both years, there were some influencing factors that tended to offset each other. We achieved significant savings from our restructuring activities and operational fitness benefit, particularly from fewer facilities and lower head count. This is clearly evident in the improved operating margin within the commercial and industrial segment, where a substantial number of the restructuring efforts were directed. Offsetting these benefits were the adverse effects of actions designed to increase inventory terms both within Snap-on and with our dealers.

The year over year growth in sell-through to our dealers' customers continued solid all year in a mid-single digit range, but in the second half, Snap-on's sales to dealers were dampened by the inventory reduction efforts. The resulting lower sales in the dealer group had an adverse impact on gross margins through both lower manufacturing absorption and our direct cost to reduce capacity near term, negatively impacting margins in both the dealer and diagnostic and information groups.

Operating expenses, excluding the special items in both years and the elimination of goodwill and other intangible asset amortization in 2002 increased $16.7m in the Q4. Significantly higher costs for the 'more feet on the street' dealer program and new product development expenses coupled with the increased worldwide bad debt provisions and inventory reduction costs previously discussed in the Q3 announcement, offset the improvements from restructuring and other savings.

Moving to the segments. In the dealer segment Q4 sales were lower year over year by approximately 2% as dealers continued to reduce their inventory levels throughout the channel. However, significant progress was made during the second half of 2002 and sequentially the impact was less in the Q4 than in the Q3. We expect dealer inventory reduction efforts to continue to have a slightly negative impact in the Q1 2003, albeit at a sequentially lower rate.

It is important to echo previous statements by Dale that overall end user demand for tools, tool storage and handheld diagnostics remained strong for the year. In the international dealer operations solid sales gains were achieved for the Q4 in the U.K., Japan and Mexico. Segment earnings were down year over year, principally reflecting the effects of lower sales volume together with the margin impact from increasing inventory turns in a slower sales environment. Along with the higher bad debt expense and increased cost for the growth initiatives like the 'more feet on the street' program and new products.

As a result of these combined effects, operating earnings, excluding special items and the elimination of goodwill decreased $14m with an operating margin of 8.1% compared with 13.2% in the prior year. Sequentially this improved about 300 basis points in the quarter, partially reflecting the seasonal improvement in sales.

In the worldwide commercial and industrial group, sales for equipment and tools grew 10.6% for the quarter. With about half of the segment's sales in the international markets, currency translation had a positive impact for the quarter of 4%. A key contributor to the sales gain is the success of new products that were launched during the past three years. Still the economic uncertainty continues to restrain the level of confidence needed for customers to make big ticket capital purchases. The European economy, particularly in Germany, seemed weakened during the autumn, while in North America we continued to bounce along the bottom. The good news is that it doesn't appear to be getting any worse and our investment in new products significantly strengthened our product offering and competitive position, even in this difficult period.

The commercial and industrial segment significant improvement in operating earnings largely reflects the cost benefits from our restructuring and operational fitness activities. In addition, the successful new products we've discussed in our power tools and equipment business units also contributed to the expanded margin. If you exclude the effects of special items and the elimination of goodwill amortization in 2002, operating earnings more than doubled and operating margin improved nearly 300 basis points to 6.2% from 3.3% a year ago.

In the diagnostics and information group sales declined 6.7% for the quarter, largely as a result of weak demand for big ticket diagnostics in both the TechRep Channel and with national accounts. This was partially offset by the introduction of new handheld diagnostic items and the growth of information products which led to a 4.1% sales increase in the segment for the full year. As anticipated, operating earnings for the quarter were down reflecting the lower sales volume and higher new product development costs. Without the effects of special items and the elimination of goodwill amortization in 2002, the segment operating earnings margin for the full year improved to 7.7% from 6.5% in the prior year, reflecting a positive impact from European restructuring savings and the benefit of new products, partially offset by the volume decline in big box diagnostics.

The financial services business continued to be driven by the overall growth and strength in dealer sales delivering a steady stream of cash and enhanced profitability in the 2002 Q4. Net finance income increased $3.3m year over year reflecting an increase in credit originations related to the U.S. dealer business, a slight uptake in lease origination from the sale of equipment, the effects from a continued favorable interest rate environment and higher year over year costs that had occurred in 2001.

Interest expense in the quarter declined to $6.5m from $8.3m in the prior year, reflecting both the substantially lower debt levels as well as continued favorable interest rates.

Now let me turn the discussion over to Martin.

Thank you Bill. I am pleased to be part of the Snap-on team and to be with you this morning. I look forward to meeting many of you in the future.

As Dale mentioned, Snap-on continues to benefit from executing and those actions designed to strengthen cash flow. During the quarter cash flow from operations amounted to $98.3m. Free cash flow after capital spending up $8.5m in the quarter was $89.8m exceeding net income. This was another goal that had been set 18 months ago and we are pleased with its achievement.

For the year cash flow from operations was an impressive $224.1m, even after the negative impact of the $28m after tax payment at the beginning of 2002 for the resolution of an unfavorable arbitration settlement. With that operating cash flow we funded about $46m in capital spending with more than two thirds of that on new products, quality and cost reduction projects. This resulted in $178.3m in free cash flow for 2002.

Our strong cash flow performance in the quarter and the year reflects the progress being made in improving working investment turnover. This improvement was particularly difficult in light of the slow economic environment and did come somewhat at the expense of operating results.

Overall working investment defined by us as inventory and receivables less trade payables, increased to 2.9 turns for the Q4, an improvement over the 2.5 turns of last year and generally flat sales.

We continued to work to achieve our target of 4 turns by 2005.

Inventories of $369.9m at yearend were down $36m from the Q3 and were down $5.3m from last year, with currency translation masking much of the year over year improvement. Had foreign currency been neutral between the years, inventories would have decreased by $25m.

Accounts receivable declined $16.6m, largely reflecting a $27.6m decrease in trade receivables, despite the 2.8% increase in year over year sales for the quarter. These trade sales outstanding improve by seven days or nearly 8% year over year.

In addition, we increased overall loss reserves to almost 7% of receivables, compared with 6.5% a year ago. Our ambitions on cash flow improvement will continue. We remain dedicated to continue our plans at reducing working investment in 2003 and beyond.

Our strong free cash flow is directed primarily towards reducing our debt throughout the year as well as for payments returned to shareholders in the form of dividends and share repurchases. Total debt net of cash decreased in the quarter by $58.6m and is down approximately $126m year over year, a decrease of 27%. Our net debt to capital ratio was 29.2% at year end down from 37.6% at the end of 2001, a very solid improvement.

While we have been paying down debt, we also increased our quarterly dividend by 4.2% this past quarter. Snap-on has paid consecutive quarterly cash dividends since 1939 and we continue to believe that the dividend is an important part of the total return for our shareholders. In addition, during the quarter, we repurchased approximately 205,000 shares under our buy-back program. For the year we repurchased 405,000 shares for approximately $12m.

Finally, the combination of our operating results along with the improvement and capital efficiency have improved our returns, which internally at Snap-on we measure and hold our senior operating management accountable for as pretext ROIZ or Ronabit return on net assets employed before interest in taxes. For 2002 it improved to 15.9% from 15.2% in 2001. Ronabit is an important component of our driven to deliver financial matrix and managements' total compensation.

In light of the significant progress we have made in terms of cash flow and net reduction we are often asked what our priorities are with regard to investment opportunities going forward. As we've said, we continue to place emphasis on accelerating internal growth, so reinvesting to support our 'more feet on the street' program and new product innovation are priorities. Our commitment to these areas is our commitment to the future of Snap-on.

We do expect to fund approximately $50m - $55m in capital expenditures in 2003 with about two thirds of that again going towards new products, quality enhancements, productivity and other growth initiatives.

Our net debt to capital target remains unchanged at 30% - 35%. However, the near term with our focus on internal process improvements and strengthening financial margins and asset returns, we will likely see that ratio fall further below 30% in the short term.

Continued share repurchases to offset dilution and possible targeted small acquisitions are other potential uses for our cash.

One near-term cash need will be funding our pension plans. Let me spend a moment on a discussion of our pension situation.

As was indicated in the press release in the Q4 we recorded an increase pension liability with a direct reduction to shareholders equity of $57.4m after taxes, within the range anticipated on our previous conference call. This has resulted from the combination of unrealized market losses on planned investments, together with the need to adjust future actuarial assumptions. We lowered the discount rate used to calculate pension obligations to 6.7% from 7.4% and also lowered the future annual expected rate of return on planned investments to 8.2% from 9.6% effective for 2003.

Our minimum required contributions in 2003 will be only $20m, in fact, $10m of this $20m contribution was already made earlier this month. We may elect to make further voluntary contributions in 2003 but probably not more than another $10m as we continue to monitor and evaluate this situation throughout the year. I should also point out that 2003 pre-tax pension expenses are expected to increase by approximately $17m compared with 2002 as a result of these factors.

Now let me share with you some of the assumptions and considerations that underpin our 2003 expectations for approximately 10% - 15% earnings growth.

As we stated in our release, we see little evidence for any overall general economic improvement in 2003, particularly in the first half of the year. While we have seen steady demand for tools by vehicle service technicians and expect that trend to continue for 2003 we will also continue our emphasis on improving inventory turns for both Snap-on and our dealers. We will continue our new product initiatives across all of our business segments. I should also point out that 2003 is a 53 week fiscal year.

Given these factors we believe we could achieve a rate of sales growth in the approximate mid-single digit range for the year, albeit greater in the second half of the year than in the first half.

With that expectation for full year sales performance, coupled with contributions from the introduction of new products, as well as cost reduction initiatives, we expect some improvement in our gross margin performance despite the negative effects from further inventory reduction.

As we have already pointed out, as is the situation for many companies, operating expense increases in 2003 will be incurred for higher retirement related and insurance costs which we estimate will add a total of $22m pre-tax to our full year 2003 operating expenses.

In addition we will continue to invest in new product development, a core component of our 'driven to deliver' program which will result in an increase in our [indecipherable] expenses in 2003 while generally remaining in the range of 2.5% - 3% of sales for the year.

These operating cost increases are expected to occur beginning in the first quarter. Partly offsetting these costs are some improvement for restructuring savings not yet fully reflected last year and other planned productivity improvements.

The largest proportion of our financial services income relates to the performance of our joint venture Snap-on Credit Corporation. Its financial results are driven both by the volume of originations and importantly by the interest rate environment. For our planning purposes we pursued the modest increase in interest rates later in 2003, which could dampen growth in our 2003 financial services income.

Interest expense has declined from the lowering of our debt levels and we've enjoyed the benefits of lower interest rates on our commercial paper borrowings. Given our cash flow performance at 2002, and our continued emphasis on working investment reduction in 2003, we expect full year 2003 interest expense to be lower than 2002.

Our effective income tax rated is expected to be lower in 2003. In 2002 it was 36% and we expect it to decline to 35% for 2003. Most of the reduction is expected to occur from anticipated operating improvements in a number of business units that either operate in lower tax rate jurisdictions or that have tax loss carry forward that we can begin to utilize in 2003. Many of these operating improvements are the result of the restructuring actions taken during the last few years.

Again, I would like to emphasize that we expect the larger portion of our expected 2003 earnings growth to come in the second half of the year. Our 2003 plans are also expected to result in improvement terms on invested capital, which we believe is an important driver of value creation for our shareholders.

Now let me turn the discussion back to Bill for his concluding comments.

Thank you Martin. Looking forward to 2003 we see exciting opportunities for our company and for our shareholders. But we are guardedly optimistic about an economic recovery, particularly with regards to the industrial sector.

Even so, we currently expect an increase in earnings per share for the full year, although the growth is skewed towards the back half. Currently we believe the broad concerns about a potential conflict and uncertainty about the impact of governmental stimuli. We will continue to keep confidence low and dampen industrial and capital goods spending in the near term.

In the coming year we will continue to emphasize consistent and broad application of our driven to deliver business process, in particular, the implementation of the leading business principles. Lean is a topic you will continue to hear us talk about throughout 2003 and beyond. We are aggressively pushing forward our adoption of these techniques throughout the corporation.

In 2003 we expect that the higher expense for our accelerated activities will largely be offset within the year by the expected savings. We believe that this will lead to strengthened profitability as well as additional sales opportunities.

I can assure you that in 2003 we will remain focused on our goals to improve performance and build shareholder value. With that we would be pleased to take your questions. Operator? Hello operator?

Today's question and answer session will be conducted electronically. If you would like to ask a question please signal by pressing star '1' on your touchtone telephone. Those of you joining today using speakerphones please pick up the handset and release the mute function so that the signal will reach our equipment. Once again, that is star '1' if you would like to ask a question. We will take our first question from Steve Girsky with Morgan Stanley.

Good morning everybody.

Hi Stephen.

I just have a handful of quick questions. First, was that the [effection] pact on operating profit? I assume it was [indecipherable], do you have an idea of how much?

Steve, it's Martin. It's very insignificant.

And the reason it's insignificant is your margins aren't that high abroad, or what's ---?

Yes, I mean, yes. The assets did improve revenues and when you roll down through it, including the increase in expenses, the affect on OI was positive but very small.

Okay. Was there any litho issues with the inventory draw-down, or no?

Litho gains?

No.

Okay. And do you expect any next year or no?

No.

Okay. What would the actual pension return for the year be, do you know?

Our performance was down and the plan was down about 8%.

Okay. Are you seeing any steel costs, raw material pressure, because I notice raw material inventory was up. Does that reflect costs or ---?

Steve, this is Bill. No, I think that is more attributable to preparation for Q1 promotional programs. I think I mentioned may be last quarter, that we have been successful in offsetting the potentials for increases in steel costs in spite of our overall productivity improvements for the year. So, we are not anticipating a huge swing in any element of the material costs.

Okay. And, I think it was Mat Tools that just announced they are going to write-off a bunch of inventories. Could there be a --. What's the pricing like in the market right now and is there a risk that they are going to be dumping tools from this market?

It's a good question, I'm really not intimately familiar with what their problems are relating to the write-offs. I would think though that this is primarily due to tools that were sold that they can't collect some. But the pricing attitude in the market from our perspective is, as has been in the past, fairly significant. No real trends down and slightly positive in our ability to extract price from the market. Again a lot of this is modified by our ability to deliver new products which kind of reset the pricing expectations.

Okay, so your net price we sort of looked at, tried to dissect the units, dealer sales and units and price?

It's a small component of positive price, I would say 1% or less.

So, units are down well more?

Right.

I now we go back and forth on this issue, but it seems like you are adding dealers at a greater rate than your revenues are growing. Are you going to continue to add dealers at this kind of rate or, just on the surface -- And I know some dealers have two trucks and stuff like that, but on the surface it seems like their income is not necessarily growing?

Yes, I think that we have mentioned this before in earlier conference calls. I think what you are seeing there is more the impact of the transition from a one-dealer group to another. And there is a lag time there that is required if you are getting a new dealer up to speed. And that type of replacement, if you will, is what's causing the effect that you're showing. Net net, the key indicators we're looking at on our business health, if you will for the dealers are all trending positively. Their collections are up, their paid sales are up and the overall financial help if you will, of the dealers, are up.

So, I think there is yet to be seen some of the dramatic impact that some were expecting because of the 10% increase in the number of 'feet per street'. We believe that's still there, but it's going to take us a little longer to get there. And again, has been offset somewhat by the softness on the equipment side. As far as future growth, we are committed to a 10% increase over two years. As we said a moment ago, we achieved that.

Looking beyond that and into the future and again, a lot of this is dependent on what happens on the competitive landscape, but we anticipate we can get into low single digit increase over time. 2% - 4% would be probably a good number, again over a long-term duration.

So, just to be clear. Do you expect, is it the right way to look at it, that dealers' sales growth will eventually meet or exceed dealer growth?

Yes, it should equalize over time but, as we've said, we've got some elements that are floating around in that. One is the immaterial reduction efforts we've been doing. The next is the equipment market softness, which has kind of pulled down the overall, but actually the dealer-focused hand tools, tools storage, power tools, is actually doing rather well we believe.

And how long does it take a dealer to mature usually, do you know?

It depends on the territory. I'd say at least 6-8 months before they really get up on their back feet, if you will and get going.

Right. All right, thanks a lot.

Our next questions will come from Alex Paris with Barrington.

Good morning.

Hi Alex.

It's just some quick questions. You mentioned capital spending for 2003, what do you estimate your depreciation amortization to be?

It would it be in the same range, as that $55m.

Okay. Your Q1 guidance of $0.37 per share, which is about equal to a year ago. Did that change any from what you were thinking, say about the time of your last guidance? Do you see a situation deteriorating or is that about what you would have expected a few months ago?

I think it is consistent with our expectations. I think that the real purpose of our commenting on the $0.37 this quarter was to make sure that everybody properly thinks about the higher expense level that begins right away in 2003 for pension, retirement and insurance expenses. You know, a year ago the first quarter we had a set of expenses that were non-recurring in nature.

That while we reported $0.37, we thought about the quarter as a $0.44 quarter. So, this is our way of reminding everybody that, while we don't have the expenses we had a year ago, we have a different set of expenses that unfortunately are going to be with us for a while. And that wrap-up in expenses, if you will, is going to begin, and has begun, beginning with this quarter.

Would you guess then as a percentage of your sales or operating costs ratio would be the highest in the Q1 relative to the rest of the year?

It generally is because of the lower level of sales in the first quarter.

But may be more so this year because of your up-front costs on the ---. It looks as though you're trying to put it that to take care of the pensions costs early in the year, rather than stretch it out.

Well, it's not really to stretch out. Pension expenses are going to be incurred because the changes we've made in rates of return assumptions and other key assumptions begin 2003. So, those expenses wrap up beginning 2003 and we have a safe sales performance for the Q1 of the history says we tend to get a higher operating expense ratio in the Q1.

Okay. Your restructuring costs, that original $40m or so. Can you clarify how much of the cost savings or benefits will carry over into 2003?

That's a pretty tough call, I think Alex. As we've said, we had half it going back to be re-invested into new products and that we did do. The other half was to be filled with the bottom line. A lot of that's been offset by what Martin just spoke about, which is the other unfortunate increases in insurances, etc. We are continuing and going ahead with further cost reductions under the lean conversions that I spoke of earlier. So, suffice to say that we are looking for substantial improvements and again, with the uncertainty, we think that's what behind the 10% - 15% earnings increase.

Thank you. Just one other quick question. The acquisition that you made at Nexiq, I don't know how to pronounce it.

Nexiq is correct.

That's quite small relative to the company, but and you mentioned heavy duty trucks. Is that more than it appears because it's maybe the start of a much more significant movement into heavy duty trucks? Or have you always had a fairly significant ---?

We surely hope it is the small under the iceberg. But we feel that the capabilities that Nexiq provides to your point and enhance what we already had done in the heavy duty diesel area, it kind of fits a niche we had in our product offerings. So, from that level it's kind of rounded out our capabilities to that type of customer base.

Secondly, it's opened up some better avenues, if you will, with the truck manufacturers and engine manufacturers, that we had kind of lapsed. Again, because of that product gap and this moves us one step closer and more upstream and the understanding of management from diesel engines in the future.

The third element which is kind of the perspective to your point, is probably more around the e-technician area, which is a telematics play potentially, that allows us to have more direct control from a remote location of engine function. That's one we're trying to get our hands around right now and are engaged in serious discussions with several potential elements of that equation, that we think are kind of interesting. Too early to quantify if that's going to be a break-through for us, but we're intrigued by the capability. Short term the good new is, the core business that's there is very sound. It's a great step for us from both the product stand-point and the distribution stand-point.

And the last point is, because we've got some very solid people in the deal as well. So, all in all - to your point, it is a small acquisition but we think is one we'd like to pattern our many acquisitions on in the future.

Didn't you already in your latest generation of some diagnostic had] built in an internet capability or a telematics capability for remote diagnosis?

We looked at internet activity but the difference is on the e-technician capability, it actually allows you to control the vehicle ECM, if it's not getting too technical for you. So that's so you can reach out and get a data stream from a vehicle and actually re-program the vehicle computer from a remote location. So, again in a fleet maintenance circumstances, you'd imagine you've got a fairly sizeable investment in the truck and its running gear. That's where we think the intriguing aspect is.

Our next question will come from Jim Lucas with Janney Montgomery Scott.

Thanks a lot, good morning.

Hello Jim.

The first question I have is, can you define sell-through? How are you measuring that? And it seems that given the complexity of having independent dealers, just trying to get a little more clarity on that if I could please.

Well, as you may remember Jim, we have a direct interface with our dealers through what we call our DSS system. So, electronically we have the capability of receiving downloads very similar to a point-of-sale circumstances you would be familiar with maybe from a direct retailer.

Okay.

So we have the opportunity and actual visibility now to reach out, if you will, and find out what's actually moving off of the trucks. And that's what driving those numbers that you spoke of.

And how are you then taking that information and translating it over to the manufacturing side of the system?

Yes, the ability for us to look out and get the granularity in the data, as far as finding web-snap on products that have actually moved off the truck as opposed to moving into the truck's inventory, is fairly recent. But over the course of this next year we have a single supply chain strategy which will combine the POS information from our sales people and our dealer truck force, backing through our IT software system into the ERP system and then blowing back all the way to the manufacturing process to the raw material supplier. So we believe we now have the capability to do a kind of beginning to end supply chain analysis which has escaped us to this point.

Okay. And if we were looking at your base-ball analogy, what inning would we be in on that?

Probably from the fifth into the sixth, with the top of the sixth would be my guess.

Okay. And then I want to get to the switchgears on the new product side, could you kind of quantify because you're talking about the R&D investment, the capital spending. Can you talk about the two different aspects of the expensing risk capitalizing on the new product side?

I'll see if I understand what you mean Jim. The conversion you mean or ---?

Conversion, it's just that you made the comment of your CAPEX last year, two-thirds of that related to new products as well as a good portion of this year's CAPEX will also be spent on new products. Are these still running 2.5% - 3% of sales? Is that CAPEX relating more to new tooling or is it software related?

Okay. I understand. Yes I would say that the categories of that spend, if you will, would be pretty broad-based. To your point, it would be a fair amount of tooling and software. We did have a little increase in software last year due to the Motis Launch, but we do have as you know, regular updates in software, but I'm not intimately familiar with the schedule and introduction for software. I would expect it would be at least on average and possibly a little higher. So, I think there's no real change in the mix of expenditure, if you will, other than as we've talked about, the efficiency in process improvements. That's probably up a little bit more as a percentage with the higher number.

Okay. And in terms of we had the big ERP conversion a few years ago, are there any other big IT spends on the horizon?

Yes, really we're doing some site conversions but they are very modest. For example, as I just mentioned Nexiq would have to be integrated on ERP, but you're looking at nominal expense to do that, so no major wholesale changes at all on the horizon.

Okay. A final question with regards to the preliminary earnings outlook this year, obviously the second half having more benefit. Of that 10% - 15%, would you say that is a grounded outlook in terms of --- is there ---. How much flexibility do you have if the second half does not materialize as you are forecasting now?

As you'd imagine I'm not a real big fan of back half-loaded years.

All right.

And we are trying to apply the right amount of prudence in light of that uncertainty. So to your point, we are going to be rather cautious and restrained on expenditure in the first half in light of that and will maintain our flexibility as much as we can through the year.

Having said that, given the uncertain nature of what is going on out there, given the potential for conflict and the effect that may have. Who knows what the net effect of the governmental [indecipherable] package will be? Who is going to win that story? We really, really don't know and that's really for the ones we think we have planned for, but unfortunately we are going to know it when we see it, given the shape of these things.

So I think we are going to be again, diligent, but again we have to reserve the reservation for not knowing what the shape of this world is going to be in six months.

Okay. Thank you.

Now we will hear from Eric Daniels with J.P. Morgan.

Good morning. I would like to drill a little deeper on the dealer group. Can you characterize for me the margin decline? How much was related to the strato-costs associated with more feet on the street? How much is related to through the mixed issue with the equipment and whatever else is comprised of that decline?

Off the top of my head Eric, I would guess it would be a third volume, a third more feet on the street etc, in the last Q3 appropriately. That is a moving target. I think, as Bill mentioned in his commentary, we have seen a sequential improvement between Q3 and Q4. We anticipate some improvement in Q1.

Obviously we have got the offsets of pension and absorption that are with us this year. We hopefully won't be with us with regards to absorption next year. Our long term goal for the newer business is to get back to those lower double digit rates that we have been traditionally. That's really what we are harking to get back to.

Okay. You often mention that part of the decline in the [Weaver] Group is weak demand for big ticket diagnostics and equipment and I would also mention the diagnostics and information group, big box diagnostics and also [indecipherable]. We don't really understand the difference between equipment in each of those segments.

Equipment is of a pretty broad term that we throw around here that I am sure maybe confuses some people. Equipment is what we would call wheel service, tire changes, wheel balancers, alignment, of that short.

Okay.

And then within diagnostics we really categorize that in two pieces. Large - what we call big box diagnostics which are traditionally the large sun machines you may have seen at various shops in your life. The rest is hand-held diagnostics, which is the scanner equipment, Lotus, that's been a strength for [standpipes] for quite some time and then the last element of that is the software.

So what we are seeing out there in the market place because of our resistance to high end capital goods purchases, is a real fall-off in the interest in sun machines. Sun machines average selling prices are north of $20,000. Similarly, as we have seen in some equipment categories, anything over around a $3,000 sale price in this market environment has been a very difficult situation.

So what we are saying in regards to diagnostics is that's really what is showing up - the resistance to higher average dollar purchasers in the large end diagnostic segment.

Okay. On the topic of accelerating in [indecipherable] growth, have any part of the current management planned this explicitly or implicitly tied to gains in organic growth?

Yes, we have got a significant segment, as you can imagine on cost reduction and also a significant segment on new product introductions as well as overall sales and operating profit improvement. So it is a balanced approach but purely favoring to generate the growth as we sit.

It looks like our next question will come from Darren Kimble with Lehman Brothers.

Hi. It's Roger Framen, good morning.

Hi Roger. How are you doing?

Good.

Yes, I didn't realize that you had point of sale inside your dealers. How long have you had that, and I thought this was something they had been resisting for a while. How were you able to get that?

Well, things happen. No, it is something we have been working at, as you said for quite some time, but we really had a favorable congruence here between an update in our BSS Online system and some extensive discussions with our dealer groups, so they understand what the benefit of providing that information to us really is.

It gets back to my previous question we had which is managing that supply chain and using that information to help improve show rates and get the batting average up, if you will, as far as customer satisfaction.

So this is something we just started. The ink is still wet on it, if you will, and we are working towards it. I think you will see much more maturation of the process and understanding through the course of this year.

That's great. Would you say this is the fourth quarter of that or --?

Well it is actually up. We are actually debugging it now. It is probably -- the last number I think I heard was about two-thirds rolled out, because we wait again for our dealers to update to this next level of software to their systems. So I take by late year that software update should be done and then back half we will start really drilling down into the analysis.

Great, I want to follow upon Steve's question from earlier in the call. I thought that you export tools to Europe from the US. I would think you would get a benefit from a strong euro in operating - is that not the case?

We do get some Roger, but the net effect of the strength in the euro just did not produce. It was positive, but it was very insignificant in terms of the operating income impact.

Because of the strength in the Euro and similar foreign currencies, you have got to remember that what we export from the US is primarily for our dealer channels and some industrial business which relatively small impact overall. Because of the supply chain a lot of those products were in the pipe and to rebuild the relationship to distributors that change over time, to do with those things, do take some time.

So in the quarter the only real impact is roughly that same 2.5% at sales, which by the time you bring it down to the operating income line, is relatively insignificant. Although there was a slight positive.

Okay. So the Euro was even stronger going into Q1 but you wouldn't expect a significant pick up from that?

No I think, this is Dale again. Given the kind of uncertain outlook in Europe right now, in particular in Germany and other markets, we are not estimating that that's going to be a huge benefit for us at all.

Okay. Which quarter is the extra week in this year?

In the Q4.

Q4, okay. How much was bad debt expense up in the Q4?

It's about $3m.

Okay. Can you put any color into this? Is this a result of adding new dealers or is this concentrated anywhere in particular?

Well no it isn't. I think it's a recognition on a lot of levels that it's been a very tough market over there, out there, for about 3 years now and we are seeing some one-time issues as we face this last year that are with us. But I couldn't point to any single area that's above and beyond I think it's more of a general reaction to the circumstances out there.

Roger, you will remember that going back to the Q3 when really we stepped up the level of bad debt reserves and we acknowledged that we would be doing that for the remainder of the year so, this wasn't unexpected and is just kind of bad tidying up of the whole back half.

Okay. Is there still going to be a step up in the first and second quarters this year?

It doesn't appear so but, again, if we had a crystal ball and perfect clarity on the first and second quarters, knowing what may happen with business in general that would be the only caveat I'd throw in.

Okay. I guess lastly, of the $22m increase in retire insurance costs you're expecting this year, how much of that is just retiring, can you isolate the insurance piece away from that?

The pensions are set at the end of the insurance pieces for, and the balance is retiring.

That would be other [indecipherable] retirement [indecipherable] here.

Correct.

Okay. Thank you.

Now we will hear from David Leiker with Robert W. Baird.

Good morning.

Hi David.

The commercial and industrial revenue gain in Q4, nice performance in a tough market. Is that type of revenue gain sustainable?

I don't think so. As we said we had about 4 points of currency in that number which gets you down to 6.6 and we did have a bit of a depressed prior year quarter, you might remember, right after 9.11?

Right.

So the comparables there were a little soft although that is not all of the explanation. There was some good improvement and it was a real good quarter for us. As you know, after three years of being in a depressed state in that segment it was welcomed. Whether it's sustainable, again it depends on the capital sense if you will, going into the first half, and as I mentioned, the uncertainty around the economic stimulus is not going to help us.

I doubt many of our customers are planning to spend their $75,000 CAPEX exemption on a new SUB, my intent is they would probably reinvest back into a little bit more of a productive asset for their business but, until that shapes up we're really uncertain whether the reaction is going to be sustainable or not.

Do you think that you lead that productive?

No, I just have a hard time believing that all small business people out there are in dire need of a $75,000 SUB as opposed to reinvesting in their business.

I agree. Under dealer group. Where do we switch around and get to the point that your revenue growth matches what's going on in the market? Is that something that '04, '05 think through?

No, I don't think it's that long, I would expect we'd see something late this year.

Again, we've got the year over year and the Q3 that we'll deal with but, I'd say Q3 slightly Q3 more Q4 this year.

Then, going forward that would match more in line with what demand is really.

That would be our belief.

Good.

Again, I'd just point out for any new viewers, listeners and so forth that, as we've moved to the adding second van, that has been one of the ways that has been very helpful in actually continuing to keep the, increasing the inventory terms for dealers because often times that they bring on a second van or so forth, those are stocked to a goodly degree out of their existing inventories, so what we've been doing is we've been bringing new people on consistently now over the last three years. That is beginning to have a cumulative impact.

Then, specifically in Q4 as you look geographically or at any particular area, is there any weakness at all on the end of the of market demand for tools?

The only concern I'd say David would be Germany. As we pointed out, that whole Euro zone area is concerning to me. We talked earlier about the FX impact on the Euro but I am getting increasingly concerned that some of the horses, if you will, that have been driving that are starting to get a little tired. Germany, well you could build a case that they're fundamentally in denial, but we don't have the time to get into that, but we have seen some issues around Spain and France where there is some trepidation based on the overall sense of uncertainty again related to the potential for conflict. Again, I think a just general concern about the Euro's own performance overall.

Outside of that we are continuing to focus our efforts on the far east. You'll be hearing more from us I think at future conference calls about our activities in that area. We're fairly positive about the potentials there but again we're just getting started. We don't have a whole lot of exposure to the Middle East area so that if something does happen in that area, that particular direct impact won't be significant. Again, it would be probably the sympathetic reaction around the world that we'd be concerned with. But that would be the only areas of softness that I would paint for you.

Then a few detailed questions. As you look on [inaudible] half Q1, would you expect Q2 earnings to be down from last year?

You know, I don't know that we're going to comment on any of these quarters going out beyond that which David we did for our full year expectation.

Okay. That looks to be toughest triumph then.

That would be correct.

Okay. On the CAPEX spending number they came in about $45m, you're talking more like $50m. Did some of that get pushed into '03 or is that just money you didn't spend.

No. We had a pretty disciplined approach to CAPEX all year and it flowed in as expected. Again, I would continue that into next year as well because of our first half concerns. One of the outgrowths of the lean enterprise, as you may know, is creativity before capital, so we're hoping to benefit somewhat from that this year as well.

In light of that though you would expect your capital spending in '03 to be up from '02?

Probably slightly but that's again depending on the circumstances and the economy in general.

Do you think you can generate more than, another $100m in cash this year?

I think we can comment on that part of it. Yes, I think there's a pretty high expectation that we'll be able to do that again.

Did you sell any receivables?

I'm sorry what was the question?

Did you sell any receivables?

No, not at all.

Okay. Perfect. Thank you.

Now we'll hear from Michael Prober with Clovers Capital. Mr. Prober your line is open. We'll move on to a follow-up question from Eric Daniels with J.P. Morgan.

Just a quick question. Can you give the eliminations by segment, the inter-segment eliminations?

I don't know that we have that.

We don't have that in front of us Eric.

Okay.

That will come out because of finalizing everything for the annual report, that probably won't get out until we publish the annual report for the think. There is a total eliminations both in the supplemental statement in the press release as well as in the [inaudible] bulletin but to break up between segments, it's still kind of the tick and tie type stuff.

All right, fair enough, thanks.

Gentlemen, there are no further questions at this time. I'll turn the conference back over to you for any concluding or additional remarks.

I'd like to thank everybody for listening in this morning, we appreciate your questions and ensuing discussions and, if anybody has additional follow-up questions or anything I'll be around my office all day and that number again is 262-656-6488. Thank you.

That does conclude today's Snap-on Incorporated Conference Call. We thank you for your participation and have a great day.